Institutions expect to increase usage of ETFs

More than one-third of institutions in Canada using exchange-traded funds (ETFs) expect to increase their allocations to ETFs in the coming year, according to a study.

Greenwich Associates’ study, Versatility Fuels ETF Growth in Canadian Institutional Portfolios, finds that nearly 45% of institutional funds expect to increase allocations to ETFs by 2014 and no funds plan to decrease allocations.

Asset managers using ETFs are poised to boost their allocations to ETFs as well, with 31% intending to move more assets into ETFs. Given that an additional 55% of study respondents say they plan to hold ETF investment steady in the coming year, nine out of 10 Canadian institutions currently using ETFs plan to maintain or increase current investments in ETFs between now and 2014.

More than 70% of institutions in the study employ ETFs in equities. Institutional funds use equity ETFs most widely for Canadian and U.S. equity exposures. Among asset managers, 83% use equity ETFs for international market exposure, putting it ahead of domestic and U.S. equities.

Given that most institutions first used ETFs in equities, it comes as little surprise to see usage in fixed income trailing that of usage in stocks. Nevertheless, 50% of institutional funds and 45% of investment managers use ETFs in domestic fixed income, and 28% use ETFs for international fixed income exposure.

Usage of ETFs is also becoming relatively common in other asset classes. For example, about one-third of the institutional funds and asset managers in the study use ETFs in real estate investment trusts.

“Canadian institutional investors are hungry for real estate exposure,” says Greenwich Associates consultant Andrew McCollum. “ETFs offer a relatively efficient means of obtaining that exposure for smaller funds or for funds concerned about the risk and complexity of investing in real estate directly.”

Liquidity and trading volume stand far and away as the most important criteria Canadian institutions consider when choosing an ETF. Eighty-three percent of institutional funds and 76% of asset managers cite the factor as a top selection criterion. Institutional funds see the tracking error of the fund and the benchmark used as other important selection factors.